Hotel owners and operators on the Lodging Industry Investment Council shared ways they have adapted their business to maximize opportunities before the cycle turns.
LOS ANGELES—While the general outlook for the U.S. hotel industry remains optimistic, owners and operators know their business can change on a dime.
According to members of the Lodging Industry Investment Council, they have adjusted their strategies accordingly to account for the new industry normal, which is largely optimistic but still has elements of uncertainty surrounding it.
For hotel operators, that means squirreling away nuts for the impending winter and keeping a tight rein on elements under their control. For hotel owners, it means maintaining low leverage and discipline when it comes to deals.
Operators ‘maximize the moment’
“We have to continue to operate optimistically in terms of how we prepare for the volume of business coming our way, but be prepared—as always—for any surprise,” said Pace Cooper, president and CEO of Cooper Hotels. “We continue to talk about being prepared for a downturn and how we’ll pivot quickly when it happens, but in the meantime, we’re operating in a way to maximize the moment and put marbles away.”
Many operators on the LIIC roundtable—which was held before the Americas Lodging Investment Summit—said they’re making capital-expenditure and labor investments while the sun shines.
“We reinvested heavily in CapEx to make sure we got the product quality up,” said Jonathan Bogatay, CEO of North Central Group. “And we’re really stressing investment in our people—having great people at the helm is the difference-maker when the market gets competitive.”
Rob Leven, chief investment officer of Procaccianti Companies and TPG Hotels & Resorts, said CapEx has been a big priority for his company’s portfolio given the demand projections over the past few years.
“We’ve been reinvesting, doing a lot of renovation work, hoping the tide will continue to be strong and knowing the supply pipeline has been picking up,” he said.
Prism Hotels & Resorts President and CEO Steve Van and High Hotels President Russ Urban agreed that keeping on top of controllable elements is the only way to keep operations tight and ready for the future.
“Lots of stuff is going to go on around you, so you have to focus on things you can control,” Urban said. “It’s expensive to do renovations right now and a challenge, but it’s one of the top three of my challenges right now—getting good, quality renovations done to keep an edge.”
For Van, focusing on the basics is the best hedge against the future.
“We keep our heads down and focus on things we can control,” he said. “There’s no better protection against the future than being a good operator.”
Brad Rahinsky, president and CEO of Hotel Equities, said brand and location play a big role in how his company focuses its efforts. Van agreed and added that means investing a lot in companies like Hyatt “because they’re growing and there are so many markets not saturated by Hyatt,” he said.
Rahinsky said he sees opportunities to drive rate in non-gateway locations.
“It’s different in Seattle or LA than it is in Atlanta or Charlotte,” he said.
Jim Butler, partner at Jeffer Mangels Butler & Mitchell and chair of the firm’s Global Hospitality Group, said his firm’s clients “feel that 2018 will be the year people quit waiting for the other shoe to drop,” and take advantage of deals and operational strategies they might not have done before.
Investors happy with current stability
Hotel owners and investors on the panel—and those who work closely with those owners and investors—were happy with the underlying fundamentals driving hotel deals in today’s market.
“We’re pretty focused now on maintaining lower leverage on anything that we do,” said Leven, whose company has been more of an active seller than buyer over the last three years. “Someday, something’s going to happen and … we don’t want to be in a position where we get caught by surprise. As long as we maintain conservative leverage points, we feel comfortable to continue to buy.”
Most panelists agreed that opportunities still exist for the right deal.
“For the right investments, there’s a lot of capital out there,” said Rick Rogovin, VP of the hospitality finance group at Wells Fargo. “There’s a lot of capital out there for deals … and the fact that foreign capital is not in the market now has changed things. … Opportunity funds do have to put capital to work in good markets and we are seeing that.”
Leven said he’s been pleased to see the stability in the capital stack.
“One thing we haven’t seen yet in this cycle is significant degradation in the debt side of the capital stack,” he said. “It’s stayed quite disciplined and quite conservative … and that creates a whole lot of underlying stability, because when things shift or go wrong, what creates pressure is when people are overleveraged or there’s a lot of leverage in the system. Generally speaking, our economy is not overleveraged as a whole and that makes for a much more solid house being built that will be able to sustain if it gets a little windy.”
What deals are out there?
Mike Cahill, CEO and founder of Hospitality Real Estate Counselors, said 2018 looks strong from a deal-volume perspective.
“The interesting question is whether certain buyers will come back into the market,” he said. “There aren’t a lot of great value-add deals out there, so people are asking if they’re happy with the cash on cash. Are your investors OK if, worst-case scenario—you exit at the same price you bought, based on the yield?”
“The hairy deals have largely dried up,” Rahinsky agreed. “I think the new value-add is the undermanaged property. Take what is an asset, get it up another eight points and monetize that, hold it for three years, five years or forever. Those top-of-the-eye-chart hairy deals that were out there years ago? Everyone’s chasing that unicorn and it’s just not there.”
Other panelists agreed that finding value is happening from different places these days, now that CapEx and renovations have already happened.
“We’ve put our capital into human resources to take a bigger piece of the pie,” Van said. “We’ve hired a lot in rate management and in sales and marketing. Even though the asset is going to be the asset and the market will be the market, we’re trying to increase the buy and make the cash flow better by stealing business.”
Stealing that business is also a strategy for Bogatay.
“In some cases you have to manufacture your own demand,” he said. “Steal from the marketplace and shift that share to yourself.”
For Urban, creating value comes in doing things in-house.
“We’ve gotten rid of all the brand revenue management and taken it all in-house,” he said. “Controlling the revenue side of the business is huge. … The way we look at everything is long-term. Particularly in the select-service space, we like to put clusters of properties together so we can afford better management.”